OREANDA-NEWS. February 12, 2016. Fitch Ratings has affirmed the 'BBB' rating on approximately \\$7.1 million of outstanding series 2009 charter school revenue bonds issued by the Colorado Educational and Cultural Facilities Authority on behalf of Crown Pointe Academy (CPA).

The Rating Outlook is Stable.


The series 2009 bonds are payable from annual lease payments made by CPA to the Crown Pointe Academy Building Corp., subject to annual appropriation by the school, and secured by a first mortgage over the financed facility. A cash-funded debt service reserve provides additional bondholder protection.


STATE MORAL OBLIGATION: The 'BBB' rating is based on CPA's inclusion in the state of Colorado's charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on the school's debt service reserve fund.

STABLE CREDIT CHARACTERISTICS: CPA's credit profile is characterized by a successful 19-year operating history, with multiple charter renewals and enrollment growth; generally breakeven to positive operations that narrowed in fiscal year 2015 due to GASB68 reporting changes; and a limited but adequate level of balance sheet resources that sufficiently covers debt service.

HIGH DEBT BURDEN: CPA's leverage position is evidenced by high debt to net income available for debt service and transaction maximum annual debt service (TMADS) that is typically above 15% of annual operating revenues but has moderated in the last two years. Partially offsetting the school's high debt burden is its ability to cover transaction maximum annual debt service (TMADS) by at least 1x from current operations over the past few fiscal years and at 1.1x in fiscal 2015.

STRUCTURAL AND LEGAL PROTECTIONS: Structural and legal provisions providing bondholder protection include the state's debt service intercept program and various reserve funds, reflecting a favorable statutory environment for charter schools.


ENROLLMENT STABILITY: The rating is sensitive to CPA's ability to maintain stable enrollment, thereby annually generating adequate debt service coverage from operations. The school is currently operating at capacity with a sizeable waiting list.

STANDARD SECTOR CONCERNS: Limited balance sheet resources; substantial reliance on enrollment-driven per pupil funding; and charter renewal risk are credit concerns common among all charter schools that, if pressured, could negatively impact the rating.


CPA is located in Westminster (about 12 miles north of Denver) and received its initial charter from Adams County School District No. 50 in 1997. The charter has been successfully renewed four times, most recently by the Colorado Charter School Institute (CSI) who granted a five-year renewal through June 2020. In 2015, CPA switched authorizers to CSI, a statewide charter granting agency. CSI reports a good relationship with CPA in full compliance and meeting all standards.


Under the program, if a charter school draws on its debt service reserve fund and fails to replenish it immediately, the authority shall submit a certificate to the Governor certifying the amount necessary to restore the reserve fund to its requirement. The Governor shall then submit a request for appropriations to the legislature in an amount sufficient to restore the reserve fund. The general assembly then, at its discretion, may appropriate to restore the reserve fund.

In order to qualify for the program, a school must merit an investment grade credit profile at the time of bond issuance, and participate in the Colorado Charter School Intercept Program. Under the intercept program, the state Treasurer pays a portion of the school's monthly per pupil revenue distribution directly to the trustee in amounts sufficient to pay debt service requirements.

The rating builds upon Fitch's view of the underlying credit quality of the charter school (bottom-up analytic approach). Moral obligation program bonds are secured separately by each school, and Fitch views each bond as project-specific. The state is actively engaged in debt issuances under the moral obligation program and the statute provides clear mechanisms to trigger the state's moral obligation. In addition to the moral obligation, the statute also provides an additional backstop (the state charter school debt service reserve fund) so that an additional appropriation due to a debt service reserve draw down is less likely to be necessary.


Student demand for CPA, which opened in 1997, remains stable. The school is currently operating at capacity with 468 students enrolled in grades K-8, up slightly from 466 last year. CPA added classes to each grade in phases over the past several years, concluding with a second eighth grade class added for the 2013-2014 school year. The school also maintains an actively managed waiting list that currently has 737 students, including non-school aged children. When only counting school aged children the waiting list still totals a robust 488 children.

All Colorado schools, including charter schools, transitioned to common core academic standards and testing in 2014/2015 academic year. This transition means that 2014/2015 academic test results are not comparable to those of prior years, and the state is still developing a rating scale for Colorado schools. As such, the Colorado Department of Education (CDE) school performance framework indicators, used to evaluate academic performance relative to state expectations, for the 2013/2014 school year is being held over for one school year.

Historically, students' scores on state assessment tests compare favorably to district and state averages.


Typical of charter schools, CPA's primary funding source is per pupil revenue (PPR) received from the district, which represented a high 87% of the school's fiscal 2015 operating revenue of \\$3.7 million. CPA's dependency on enrollment-related PPR and its relatively small size result in limited revenue flexibility and emphasize the need to carefully manage enrollment, which the school has demonstrated as it grew to full capacity over the past few years. Fitch notes favorably that the state's fiscal position continues to improve. PPR increased by 3.8% in FY16 with a smaller 1.4% increase expected in FY17.

Enrollment growth enabled CPA to produce generally breakeven to positive operating margins over the past few years. Its margin averaged a sound 2.1% over fiscal years 2010-2014. In fiscal 2015, the margin declined to a negative 4.1% due to GASB 68 reporting changes, under which CPA now recognizes the full change in net pension liability and other non-cash changes as an operating expense in the government-wide income statement. Adjusting for the new non-cash charges, CPA's operating results would have improved slightly over the prior year. Management reports that fiscal 2016 year-to-date results are tracking to budget.

CPA's balance sheet resources provide only a limited financial cushion. As of June 30, 2015, available funds, defined by Fitch as cash and investments not permanently restricted, totaled \\$1.3 million, similar to prior years. Available funds covered fiscal 2015 operating expenses (\\$3.8 million) and outstanding debt (\\$7 million) by 34% and 18%, respectively. Fitch considers these liquidity metrics low, although above many other Fitch rated charter schools.

Pro forma MADS of about \\$1 million represented a still high 27% of fiscal 2015 operating revenues but down from 31% in fiscal 2014. CPA's debt service schedule follows the fairly typical charter school structure which incorporates a large final year payment, with the intent of using the balance of the debt service reserve to offset this payment. Therefore, Fitch also looks at TMADS, which excludes the final year payment, as a better indicator of typical debt service costs over the life of the bonds. This translates to about \\$505,000, resulting in a much lower but still high 13.7% burden. Total debt outstanding to net income available for debt service was also high at 13x in fiscal 2015, though slightly improved from prior years.

CPA has been able to adequately cover TMADS from operations for the past five fiscal years, which Fitch views favorably. Coverage ranged from 0.9x to 1.3x during fiscal years 2010-2015. Coverage was 1.1x in fiscal 2015 based on net income available for debt service of \\$547,000 (includes approximately \\$200,000 to offset non-cash pension expense). Based on the improved state funding environment and CPA's lack of additional debt plans or material capital needs, Fitch believes the school's debt burden should continue to moderate over time.